October 3, 2016

Heineken was up 2.6%. I have not bought any of this company yet but I would like to grab at least a few shares at some point. (Apparently though, I will NOT then be allowed to write off beer purchases as a research expense).

The Canadian Finance Minister announced today certain measures to cool the hot housing market.

A key point was that those getting a five year locked in mortgage rate and with less than 20% down and therefore needing CMHC insureance will have to be able to afford the mortage if it were at the higher Bank of Canada five-year mortgage rate. Which begs the question: What is the Bank of Canada five year mortgage rate, and why does it exist?

It is the rate for a five-year conventional mortgage (meaning non-CMHC insured, meaning at least 20% down payment). It is published as a data series here. It is not a rate set by the Bank of Canada (which certainly does not offer mortage lending). It presumably is supposed to be the rate that banks are typically charging (or advertising) for a five-year conventional mortgage. Currently it is 4.64% which is however, well nabove the going posted five year mortgage rate at most of the big banks and is higher than the average.

This seems like a bit of a silly rate to use. A better stress test might be 1.0% above the actual rate. Also the banks can likely manipulate (I mean influence) this rate down by simply posting more realistic five year mortgage rates that reflect the lower rates that people actually get. (Some banks post a higher official rate but then give almost everyone a discount).

Another change today was to eliminate the principal residence deduction on houses bought by non-residents. Canadian residents will now have to declare the value of the gain on their house as opposed to the current (rather lax) system of not having to report the gain. It IS an (another) invasion of privacy. It remains better than the alternative of eliminating this exemption.

Today’s moves come on top of BC’s move to impose a special 15% transfer tax on foreign home buyers in Vancouver. Many people predicted that this would not stop foreign buyers as it was said that such buyers were not price sensitive. But it is one thing to pay more for a house in a market where all buyers were paying more and where it was believed that the price paid would be recouped (even after real estate fees and the normal transfer tax) upon sale. It is quite another thing to expect foreign buyers, and only foreign buyers, to pay 15% more and which amount cannot be recouped later as it will not apply to most buyers and therefore the resale prices will not magically increase to allow foreign buyers to recoup the tax. So, it is no surprise that foreign buying in Vancouver has all but dried up. The buyers will look elsewhere or just decide not to buy. It is a matter of opinion as to whether the tax is good or bad but it is a matter of common sense that it would put a real damper on the level of foreign buying and therefore will tend to push down house prices in Vancouver as the foreign segment of the buyers will have been pushed out.